| Basis of Presentation and Summary of Significant Accounting Policies | 2.
Basis of Presentation and Summary of Significant Accounting Policies Unaudited Condensed Consolidated Financial Statements The accompanying condensed consolidated financial statements include the accounts of Coherus and its wholly-owned subsidiaries as of June 30, 2019: Coherus Intermediate Corp, InteKrin Therapeutics Inc. (“InteKrin”), and InteKrin’s wholly-owned subsidiary, InteKrin Russia. Unless otherwise specified, references to the Company are references to Coherus and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring accruals that the Company believes are necessary to fairly state the financial position and the results of the Company’s operations and cash flows for interim periods in accordance with U.S. GAAP. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue and expenses, and related disclosures. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Foreign Currency The functional currency of InteKrin Russia, which the Company acquired in February 2014, is the Russian Ruble. Accordingly, the financial statements of this subsidiary are translated into U.S. dollars using appropriate exchange rates. Unrealized gains or losses on translation are recognized in accumulated other comprehensive loss in the condensed consolidated balance sheet. The foreign exchange gains and losses recorded in other income, net in the condensed consolidated statements of operations for the three months ended June 30, 2019 and 2018, were a net gain of $61,000 and a net loss of $270,000, respectively, and for the six months ended June 30, 2019 and 2018 were a net gain of $230,000 and a net loss of $278,000, respectively. Segment Reporting The Company operates and manages its business as one reportable and operating segment, which is the business of developing and commercializing biosimilar products, and, as part of the InteKrin acquisition, small molecules. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Long-lived assets are primarily maintained in the United States of America. See Note 6 for disclosures about product sales and revenue from major customers. Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash is comprised of cash and highly liquid investments with remaining maturities of 90 days or less at the date of purchase. The Company limits cash investments to financial institutions with high credit standings; therefore, management believes that there is no significant exposure to any credit risk in the Company’s cash, cash equivalents and restricted cash. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets and which, in aggregate, represent the amount reported in the condensed consolidated statements of cash flows.
June 30,
June 30,
2019
2018
Cash and cash equivalents
$
105,927
$
130,005
Restricted cash
50
50
Restricted cash - non-current
785
785
Total cash, cash equivalents and restricted cash
$
106,762
$
130,840
Restricted cash consists of cash held in money market accounts at banks. The restricted cash is used as collateral against the Company’s corporate credit cards and is classified as current; restricted cash – non-current is held to cover the standby letter of credit issued by the Company’s landlord to drawdown on in the event the facility lease is breached. Trade Receivables Trade receivables are recorded net of allowances for chargebacks and cash discounts for prompt payment. The Company’s estimate of the allowance for doubtful accounts is based on an evaluation of the aging of its receivables. Trade receivable balances are written off against the allowance when it is probable that the receivable will not be collected. To date, the Company has determined that an allowance for doubtful accounts is not required. Investments in Marketable Securities Management determines the appropriate classification of investments in marketable securities at the time of purchase based upon management’s intent with regards to such investments and reevaluates such designation as of each balance sheet date. All investments in marketable securities are held as “available-for-sale” and are carried at the estimated fair value as determined based upon quoted market prices or pricing models for similar securities. The Company classifies investments in marketable securities as short-term when they have remaining contractual maturities of one year or less from the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of accumulated comprehensive income (loss). Realized gains and losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are included in other income, net, based on the specific identification method. Inventory Prior to the regulatory approval of its product candidates, the Company incurred expenses for the manufacture of drug products that could potentially be available to support the commercial launch of its products. The Company began to capitalize inventory costs associated with UDENYCA ® ® Inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. Inventory costs include third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process and indirect overhead costs. The Company primarily uses actual costs to determine the cost basis for inventory. The determination of whether inventory costs will be realizable requires management review of the expiration dates of UDENYCA ® Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, other liabilities, and lease liabilities, non-current in the condensed consolidated balance sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the incremental borrowing rate based on the information available at the lease commencement date. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term. Revenue Recognition The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations ; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ; and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , (collectively, the “New Revenue Standard”) on January 1, 2018 using the modified retrospective method. Topic 606 supersedes all previous revenue recognition requirements in accordance with generally accepted accounting principles. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration to which the entity is entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines is within the scope of Topic 606, it performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transferred to the customer. Net Product Revenue The Company sells UDENYCA ® ® ® ® to Healthcare Providers ® Product Sales Discounts and Allowances Revenues from product sales are recorded at the net sales price (“transaction price”), which includes estimates of variable consideration for which reserves are established and that result from chargebacks, rebates, co-pay assistance, prompt-payment discounts, returns and other allowances that are offered within contracts between the Company and its Customers, Healthcare Providers, payers and GPOs relating to the sales of UDENYCA ® Chargebacks: Chargebacks are discounts that occur when Healthcare Providers purchase directly from a Customer. Healthcare Providers, which belong to Public Health Service institutions, non-profit clinics, government entities, GPOs, and health maintenance organizations, generally purchase the product at a discounted price. The Customer, in turn, charges back to the Company the difference between the price initially paid by the Customer and the discounted price paid by the Healthcare Providers to the Customer. The allowance for chargebacks is based on an estimate of sales through to Healthcare Providers from the Customer. Discounts for Prompt Payment: The Company provides for prompt payment discounts to its Customers, which are recorded as a reduction in revenue in the same period that the related product revenue is recognized. Rebates: Rebates include mandated discounts under the Medicaid Drug Rebate Program, other government programs and commercial contracts. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with these public sector benefit providers. Certain rebate amounts commensurate with share utilization of UDENYCA relative to other pegfilgrastim products. The accrual for rebates is based on statutory or contractual discount rates and expected utilization. The estimates for the expected utilization of rebates are based on Customer and commercially available payer data, as well as data collected from the Healthcare Providers, Customers, GPOs, and historical utilization rates. Rebates invoiced by payers, Healthcare Providers and GPOs are paid in arrears. If actual future rebates vary from estimates, the Company may need to adjust its accruals, which would affect net product revenue in the period of adjustment. Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue. Product Returns: The Company offer to its Customers limited product return right, which is principally based upon damaged, defective or the product’s expiration date. Product return allowance is estimated and recorded at the time of sale. Other Allowances: The Company pays fees to Customers and GPOs for account management, data management and other administrative services. To the extent that the services received are distinct from the sale of products to the customer, these payments are classified in selling, general and administrative expense in the Company’s condensed consolidated statements of operations, otherwise they are included as a reduction to product revenue. Cost of Goods Sold Cost of goods sold consists primarily of third-party manufacturing, distribution, and overhead costs associated with UDENYCA ® ® ® On May 2, 2019, the Company and Amgen settled a trade secret action brought by Amgen. The Company will pay a mid-single digit royalty on net product revenue to Amgen beginning on July 1, 2019 for five years. Cost of goods sold for the six months ended June 30, 2019, included write-off of prepaid manufacturing costs of $1.3 million due to the cancellation of certain manufacturing reservations, and $0.4 million due to the write-off of excess and obsolete inventory. Research and Development Expense Research and development costs are charged to expense as incurred. Research and development expense includes, among other costs, salaries and other personnel-related costs, consultant fees, preclinical costs, cost to manufacture drug candidates and clinical trial costs and supplies, laboratory supplies costs and facility-related costs. Costs incurred under agreements with third parties are charged to expense as incurred in accordance with the specific contractual performance terms of such agreements. Costs of third parties include costs associated with manufacturing drug candidates, preclinical and clinical support activities. Advance payments for goods or services to be received in the future and utilized in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are received. The Company considers regulatory approval of product candidates to be uncertain, and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. The Company expenses manufacturing costs as incurred to research and development expense for product candidates prior to regulatory approval. If, and when, regulatory approval of a product is obtained, the Company will begin capitalizing manufacturing costs related to the approved product into inventory Comprehensive Income (Loss) Comprehensive income (loss) is composed of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity (deficit), but are excluded from net income (loss). The Company’s other comprehensive income (loss) includes unrealized gains and losses from available-for-sale marketable securities and foreign currency translation adjustments for the six months ended June 30, 2019 and 2018. Net Income (Loss) per Share Attributable to Coherus Basic net income (loss) per share attributable to Coherus is calculated by dividing the net income (loss) attributable to Coherus by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive common shares. Diluted net income (loss) per share is computed by dividing the net income (loss) per share by the weighted average number of common shares outstanding for the period plus any diluted potential common shares outstanding for the period determined using the treasury stock method for options, RSUs and ESPP and using the if-converted method for the convertible notes (see Note 11). Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had accrued no amounts for interest and penalties related to income tax matters in the Company’s consolidated balance sheet at June 30, 2019 and December 31, 2018. For the three and six months ended June 30, 2019, the Company recorded income tax provision of $51,000, which comprised of state taxes in jurisdictions outside of California for which the Company has a limited operating history. Income tax provision during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period in accordance with ASC 740-270. The income tax provision for the three months ended June 30, 2019 differs from the U.S. federal statutory rate of 21% primarily due to effect of change in the valuation allowance against the Company’s federal deferred tax assets which reduced the Company’s net tax expense. The Company maintains a full valuation allowance against its net deferred tax assets due to the Company’s history of losses as of June 30, 2019. Recent Accounting Pronouncements The following are the recent accounting pronouncements adopted by the Company in 2019: In February 2016, the FASB issued ASU No. 2016-02, Leases Leases The impact of the adoption of Topic 842 on the accompanying condensed consolidated balance sheet as of January 1, 2019 was as follows (in thousands):
December 31, 2018
Adjustments Due to the Adoption of Topic 842
January 1, 2019
Operating lease right-of-use asset
$
—
$
7,172
$
7,172
Operating lease liabilities:
Other current liabilities ( 1)
$
419
$
1,665
$
2,084
Other lease liabilities, non-current ( 2)
$
1,645
$
5,466
$
7,111
______________________________________________________ (1) Includes current portion of deferred rent and current portion of operating lease liabilities. (2) Non-current portion of deferred rent and operating lease liabilities. The impact of the adoption of Topic 842 on the accompanying condensed consolidated statement of operations as of and for the three and six months ended June 30, 2019 were as follows (in thousands):
Three Months Ended June 30, 2019
Balance without
As Reported
Higher (Lower)
the Adoption
Research and development
$
18,883
$
39
$
18,922
Selling, general and administrative
$
36,456
$
43
$
36,499
Total operating expenses
$
55,940
$
82
$
56,022
Income from operations
$
27,493
$
(82
)
$
27,411
Net income
$
23,567
$
(82
)
$
23,485
Net income attributable to Coherus
$
23,567
$
(82
)
$
23,485
Six Months Ended June 30, 2019
Balance without
As Reported
Higher (Lower)
the Adoption
Research and development
$
37,672
$
83
$
37,755
Selling, general and administrative
$
69,139
$
87
$
69,226
Total operating expenses
$
109,637
$
170
$
109,807
Income from operations
$
10,894
$
(170
)
$
10,724
Net income
$
3,563
$
(170
)
$
3,393
Net income attributable to Coherus
$
3,563
$
(170
)
$
3,393
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. January 1, 2019 and such adoption did not The following are the recent accounting pronouncements that the Company has not yet adopted: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (ASU 2016-13). In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements The Company has reviewed other recent accounting pronouncements and concluded they are either not applicable to the business or that no material effect is expected on the consolidated financial statements as a result of future adoption. |
